The First Bank of the United States (1791-1811)

The First Bank of the United States is considered a success
by economic historians. Treasury Secretary Albert Gallatian
commented that the Bank was "wisely and skillfully managed"
(Hixson, 114). The Bank carried a remarkable amount of
liquidity. In 1809, for example, its specie/banknote ratio was
about 40 percent (compared to a modern average reserve/deposit
ratio of about 12 percent) making it probably the most liquid
bank in the U.S. at the time. Despite the liquidity, the Bank
was also profitable, earning most of its income through
substantial loans to both government and private business. It
helped to end several bank runs by transferring funds to banks in
need of temporary liquidity.

The chief argument in favor of the Bank's renewal in 1811
was that its circulation of about $5 million in paper currency
accounted for about 20 percent of the nation's money supply
(Symons, 12). It was the closest thing to a national currency
that the U.S. had. Ironically, this may have contributed to its
downfall because the Bank's issuance of notes came at the expense
of state banks. In addition, the currency issued by the Bank
was not discounted, whereas the currency issued by the 712 state
banks were discounted anywhere from 0 to 100 percent. However,
the arguments against the Bank were too strong. Foreign
ownership, constitutional questions (the Supreme Court had yet to
address the issue), and a general suspicion of banking led the
failure of the Bank's charter to be renewed by Congress. The
Bank, along with its charter, died in 1811.

Following the Bank's disappearance, state banks, unhindered
by either state regulations or the discipline imposed by the Bank
of the U.S., greatly increased the number of bank notes in
circulation. John K. Galbraith writes of the period, "State banks,
relieved of the burden of forced redemption [imposed by the First
Bank], were now chartered with abandon; every location large enough
to have 'a church, a tavern, or a blacksmith shop was deemed a suitable
place for setting up a bank.' These banks issued notes, and other,
more surprising enterprises, imitating the banks, did likewise. 'Even
barbers and bartenders competed with banks in this respect'" (Galbraith, 58).
Coupled with the disruptions associated with the war with England,
this caused considerable inflation from 1812-1815. During that period,
prices rose an average of 13.3 percent per year. An 1815 attempt
to establish a new central bank failed, but by 1816 a consensus emerged
for a return to central banking (Ibid, 13).